Regents of the Univ. of Cal. v. Burwell

155 F.Supp.3d 31

Regents of the University of California, et al., Plaintiffs,

v.Sylvia M. Burwell, Secretary, Department of Health and Human Services, Defendant.

Civil Action No. 13–683 (RDM)

United States District Court, District of Columbia.

Signed February 22, 2016

Jordan B. Keville, Hooper, Lundy & Bookman, PC, Los Angeles, CA, Robert L. Roth, Hooper, Lundy & Bookman, PC, Washington, DC, for Plaintiffs.

Eric J. Soskin, Peter C. Pfaffenroth, U.S. Department of Justice, Washington, DC, for Defendant.

MEMORANDUM OPINION

RANDOLPH D. MOSS, United States District Judge

Under the Medicare program, the government reimburses health care providers for certain expenses incurred in treating Medicare beneficiaries. See Social Security Act of 1965, Pub. L. No. 89–97, tit. XVIII, 79 Stat. 286, 291 (codified as amended at 42 U.S.C. § 1395 et seq. ) (“Medicare Act”). The Medicare wage index reflects regional variations in hospital wage costs and is one factor used to determine the amount of a provider's reimbursement. In 2005, the Department of Health and Human Services adopted a rule that purported to clarify the accounting method used to calculate the wage index. In this action, numerous hospitals and related entities challenge the application of the 2005 Rule to the wage indices for federal fiscal years (“FFYs”) 2007 and 2008.

The matter is presently before the Court on the parties' cross-motions for summary judgment. Dkts. 21, 23. The Court held oral argument on the motions on February 16, 2016. Plaintiffs contend that application of the 2005 Rule to the FFYs 2007 and 2008 wage indices constitutes impermissible, retroactive rulemaking because the wage index for a given fiscal year is based on cost data submitted by providers three or four years earlier, and Plaintiffs submitted their cost data in accordance with the accounting rules then in effect. Plaintiffs further argue that the 2005 Rule “is inconsistent with the overall purpose and objective of the wage index statute;” that the Secretary of Health and Human Services (“Secretary”) and her intermediaries have inconsistently applied the rule without an adequate explanation; and that “the Secretary erred in applying it to the ... plaintiffs in this case.” Dkt. 21–1 at 21. The Secretary responds that the 2005 Rule is a valid exercise of the discretion delegated to her pursuant to the wage-index provision of the Medicare Act. Dkt. 23 at 13–21. She also contends that Plaintiffs waived any retroactivity claim by failing to raise it in the notice-and-comment process preceding adoption of the rule, id. at 21–22; that, in any event, the rule does not operate retroactively, id. at 22–26; and that, even if it did, the statute authorizes retroactive regulation in these circumstances, id. at 26–28. Finally, she contends that any alleged inconsistency in the application of the 2005 Rule is merely a byproduct of the agency's discretion whether to initiate an audit, id. at 30–32, and that Plaintiffs are not entitled to a special exemption from the rule, id. at 33– 36. For the following reasons, the Court DENIES Plaintiffs' motion, Dkt. 21, and GRANTS the Secretary's motion, Dkt. 23.

I. BACKGROUND

A. Statutory and Regulatory Background

Prior to 1983, Medicare providers “were reimbursed for the actual costs that they incurred, provided they fell within certain cost limits,” including the requirement that they be reasonable. Methodist Hosp. of Sacramento v. Shalala , 38 F.3d 1225, 1227 (D.C.Cir.1994). As a result, when “hospital costs increased, so too did Medicare reimbursements.” Id. In 1983, however, “Congress ... completely revised the scheme for reimbursing Medicare hospitals” and adopted the Prospective Payment System (“PPS”) in order “to encourage health care providers to improve efficiency and reduce operating costs.” Id. Under the PPS, qualifying hospitals are reimbursed using fixed, prospective rates for a specified category of treatment. Id. In the typical case, the reimbursement rate does not vary from patient to patient or provider to provider. Id. Cf. Cnty. of L.A. v. Shalala , 192 F.3d 1005, 1009 (D.C.Cir.1999) (explaining supplemental “outlier payments”). “By establishing predetermined reimbursement rates that remain static regardless of the costs [actually] incurred by a hospital [in an individual case], Congress sought ‘to reform the financial incentives hospitals face, promoting efficiency in the provision of services by rewarding cost[-]effective hospital practices.’ ” Cnty. of L.A. , 192 F.3d at 1008 (quoting H.R. Rep. No. 98-25, at 132 (1983), as reprinted in 1983 U.S.C.C.A.N. 219, 351).

Under the PPS, wages and wage-related costs are a “significant component of the Medicare payment” that qualifying hospitals receive. Anna Jaques Hosp. v. Sebelius , 583 F.3d 1, 2 (D.C.Cir.2009) (“Anna Jaques I ”). “Because these costs vary widely across the country, Congress requires the Secretary to adjust Medicare reimbursements according to ‘area differences in hospital wage [s].’ ” Id. (quoting 42 U.S.C. § 1395ww(d)(3)(E)(i) (alteration in original)); see also 42 U.S.C. § 1395ww(d)(2)(H). The wage index is the mechanism by which the Secretary does so. It is “a factor (established by the Secretary) reflecting the relative hospital wage level in the geographic area of the hospital compared to the national average hospital wage level.” 42 U.S.C. § 1395ww(d)(3)(E)(i). As the D.C. Circuit has explained:

The wage index reflects a requirement in the 1983 Amendments that the federal rate be adjusted to reflect geographic variations in labor costs. See 42 U.S.C. § 1395ww(d)(2)(H). The area wage indexes for each region are based on wage-cost data periodically submitted by Medicare hospitals across the country. The indexes are used at two points in the prospective payment rate calculation. First, regional wage indexes are used (along with other factors, such as inflation and hospital case-mix ratios) to modify and standardize the data used to establish the nationwide “federal rate.” See 42 U.S.C. § 1395ww(d)(2)(C)(ii). Second, once the federal rate has been set, the wage indexes are used to make regional adjustments to the labor-related portion of the federal rate. See 42 U.S.C. § 1395ww(d)(2)(H). Because each wage index is used to develop the base national rate as well as to adjust that rate by region, a change in any single wage index can affect the reimbursement rate of each hospital in the country.

Methodist Hosp. , 38 F.3d at 1227–28 (internal footnote omitted).

The Medicare Act requires the Secretary to update the wage index “at least every 12 months ... on the basis of a survey conducted by the Secretary (and updated as appropriate) of the wages and wage-related costs of subsection (d) hospitals in the United States.” 42 U.S.C. § 1395ww(d)(3)(E)(i). The statute also requires that the Secretary ensure that the aggregate, adjusted payments do not exceed the aggregate payments “that would have been made in the year without such adjustment.” Id. “On all other aspects of the wage-index calculation,” however, “the statute is silent.” Anna Jacques Hosp. v. Burwell , 797 F.3d 1155, 1163 (D.C.Cir.2015) (“Anna Jacques II ”).

To calculate the wage index, the Secretary uses data from cost reports that hospitals file annually with fiscal intermediaries, which act as the Secretary's agents in administering the PPS.¹ 42 U.S.C. § 1395h. Historically, the wage index was calculated using data collected in Worksheet S-3, Part II, of providers' cost reports. See Dkt. 21–1 at 12; Dkt. 23 at 9; 42 C.F.R. § 413.20(b). “For each fiscal year, the wage index is based on data reported by hospitals 3 or 4 years earlier in annual cost reports.” Dkt. 23 at 9; accord Dkt. 21–1 at 11; see also Anna Jaques I , 583 F.3d at 3. For example, the wage index for FFY 2007 (which began October 1, 2006) was based on data from hospitals' cost reports for the hospitals' fiscal years that began during FFY 2003. Dkt. 14–5 at 114.

The present case concerns regulations governing the accounting method used to calculate the wage index. In particular, the Plaintiffs challenge the application of a rule adopted in August 2005 to pension costs reported in June 30, 2004 and June 30, 2005 cost reports and used to calculate the wage indices for FFYs 2007 and 2008, respectively. The following is an overview of the evolution of the relevant rules.

On September 1, 1994, the Secretary promulgated a final rule making changes to, inter alia , the methodology for calculating the wage index. See Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 1995 Rates , 59 Fed. Reg. 45,330 (Sept. 1, 1994) (“1994 Rule”). As relevant here, the Preamble to the 1994 Rule stated that hospitals should “follow Generally Accepted Accounting Principles (GAAP) in developing the wage-related costs contained in the Worksheet S-3, Part II, for purposes of the hospital wage index.” Id. at 45,357. The Secretary explained:

We believe it is appropriate to apply GAAP for these purposes because the function of the wage index is to measure relative hospital labor costs across areas. This function is distinct from that of cost reimbursement, in which applicable Medicare principles (which may differ from GAAP) measure the actual costs incurred by individual hospitals. We believe the application of GAAP for purposes of compiling data on wage-related costs used to construct the wage index will more accurately reflect relative labor costs, because certain wage-related costs (such as pension costs) as recorded under GAAP tend to be more static from year to year. Application of Medicare principles, on the other hand, could create large swings in these costs from year to year, particularly in years when there are large over- or under-funded pension estimates; such application might lead to a wage index that does not accurately reflect relative labor costs.

Id. (emphasis in original). The regulation was made “effective for cost reporting periods ...